iPhone could have a ripple effect

by Jason Gertzen

The debut of the much-heralded iPhone is thought to be imminent, though Apple and AT&T Inc. executives remain mum on the exact timing.

Apple, which is making the device, and AT&T, which is providing the wireless network for the iPhone, both are positioned to be the prime beneficiaries of the new high-tech product. But other companies, such as Verizon Wireless and Sprint, also are likely to reap the rewards of new business as consumer attention increasingly turns to handheld portable stereos that also can make calls.

“It is probably the most anticipated phone in living memory,” said Roger Entner, a wireless industry maven who is a senior vice president with New York-based IAG Research. “Carrying around one device is very convenient.”

Steve Jobs, Apple’s chief executive officer, confirmed rampant speculation about an iPhone earlier this year. He appeared before a major gathering of Apple aficionados and held aloft a glitzy new device that artfully meshes a mobile phone, iPod music player and Internet connection.

“IPhone is a revolutionary and magical product that is literally five years ahead of any other mobile phone,” Jobs declared.

Hyperbole? Possibly.

Consider, though, that Jobs’ company recently marked the sale of its 100 millionth iPod, which in Apple’s words made it the “fastest-selling music player in history.”

Apple and AT&T executives have substantial aspirations for iPhone sales. Jobs set a target of selling 10 million by the end of 2008. The iPhone will be sold through Apple and AT&T retail stores and online.

Wireless carriers constantly jostle for attention in a fiercely competitive industry. Links to Apple and its legions of fanatical followers could bring advantages for AT&T.

“It will drive a lot of interest and traffic for us,” said Rob Hyatt, AT&T’s executive director of marketing for wireless services.

Once those prospective customers walk in the door, AT&T representatives will pitch a broad menu of ways to take tunes on the go, Hyatt said.

“We will have a cool set of music services on many devices as well as the iPhone,” Hyatt said.

Major shifts in the music industry have left consumers grappling for new ways to manage music collections that may include everything from vinyl records to digital tunes on computers, phones and portable devices.

“All my music is scattered around,” Hyatt said. “We are trying to let users own it across multiple places and multiple devices.”

With some 230 million Americans already carrying a cell phone, wireless carriers seeking growth increasingly must poach subscribers from rivals. Plus, all the competition has driven down prices for calls.

Music is emerging as an important potential solution for both problems.

A consumer who loads a phone with music is less likely to bolt for another cell phone company touting some bargain-priced deal, Hyatt said. Phones typically cannot be transferred from one company to another, creating big hassles for a subscriber trying to transfer a music collection to a new device.

“They have a tighter and closer relationship to us and the phone,” Hyatt said. “It is harder for them to go anywhere else.”

Music-playing services also can be lucrative for the phone companies. Sales of the broader category of so-called wireless data services, which include music, have been climbing rapidly for all the carriers.

Sprint, for example, reported earlier this month that it was bringing in $4.6 billion a year from these services, or about $9.25 per month from each of its customers.

A collection of more than 1.6 million songs in the Sprint Music Store; access to streaming music, video and satellite radio channels; and sponsorships of concert tours are among the music initiatives receiving a great deal of Sprint’s marketing attention.

The introduction this spring of the “Upstage,” a new Samsung phone intended for playing music, is another example of how Sprint is responding to the opportunity offered by music and the challenge posed by the coming iPhone.

“Sprint makes it easy for our customers to get their favorite music on one device they have with them at all times,” said Alana Muller, Sprint’s director of wireless data programs and marketing.

The initial versions of the iPhone will require connections with a computer to load songs. Sprint touts advantages of its service, which already has downloaded more than 15 million songs over the air to its customers’ phones.

“We truly provide wireless music wirelessly,” Muller said.

Music-oriented phones have been selling at a brisk pace, said Lewis Ward of IDC. The estimated 37 million consumers carrying them, however, represent only about 15 percent of the overall market.

Plus, only a small fraction of those actually use the phones to download music, Ward said.

Text messaging probably is the most widely used wireless data service, but it still is used by no more than half of consumers, Ward said.

“That is the most pervasive data service in the world,” he said. “The idea that mobile music is going to approach that anytime soon is extremely unlikely.”

The announced $500 and $600 prices of the iPhone have raised questions about whether it will appeal to a broad swath of consumers. Sprint has been noting that it offers multiple music-playing phones that can be had for less than $100 each.

Apple executives have said that the combo device would be worth the money considering that a popular iPod Nano goes for $199 and sophisticated, feature-packed cell phones typically sell for at least $299.

Apple will bring considerable cache and an impressive product portfolio, but the iPhone prices create a formidable obstacle to selling the device in large quantities to telephone consumers, said IAG’s Entner.

“Americans typically have never paid the full price that the cell phone even costs to manufacture,” Entner said.

Despite this factor, Entner said, the iPhone is likely to enjoy success. He also expects to see a “ruboff effect” benefiting multiple companies offering music services.

“The Apple phone is being positioned as the Rolls-Royces or Ferraris of all phones,” Entner said.

Not everyone, of course, can afford such a pricey model.

“You go to the Ferrari dealership and ogle the Ferrari,” Entner said, “but then you go buy a Pontiac.”

// Marginal Utility

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